The Ironman Competition: Public Companies Garmin and TomTom Prepare for Better Days
September 2, 2009 By: Stephen ColwellA little more than a year ago the bottom began to fall out of our GNSS world. Companies that were positioned to make their venture and investor partners rich beyond their dreams proved to be castles in the sand. Big dreams had been built on the confidence and sales growth reported by the industry stalwarts. Publicly traded companies such as Garmin and TomTom demonstrated an exponential growth in sales that drove the private investor in throwing money at new GPS/LBS start-ups.
Like a slow moving tsunami, the wave of water kept rising, pushing consumers farther away and many opportunities just evaporated. The bigger public companies took their hits as well, but their sheer size and volume afforded a certain degree of protection. This, by all means, was not just a glancing blow that would heal itself but an exercise in fortress defense. Garmin and TomTom took a hard look at their future markets and adopted new defensive-survival strategies. Surgically, they altered their companies’ practices to reduce expenditures, inventories, and staff. Gary Burrell, the co-founder of Garmin, once told me, “You’ve got to walk in a lot of back alleys to find the freeway.”
Garmin
Looking at the recent SEC filings of quarterly reports for 2009 speaks considerable volumes about each company’s path towards survival and growth initiatives. Garmin has always had the reputation of a well-run conservative operation. Their latest quarter summary versus the same time last year shows hard-line efforts in operational streamlining. Reporting for third quarter 2009, the results show the following:
Garmin explains:
“Net sales decreased 26.6% for the 13-week period ended June 27, 2009, when compared to the year-ago quarter. The decline occurred across all segments with the greatest decline in the automotive/mobile segment, as well as aviation. Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 69.3% in the second quarter of 2008 to 65.3% in the second quarter of 2009.
“Total unit sales decreased 5% to 3,715,000 in the second quarter of 2009 from 3,920,000 in the same period of 2008. The lower unit sales volume in the second quarter of fiscal 2009 was attributable to declining volumes across all segments with the greatest percentage declines occurring in aviation and marine.
“Automotive/mobile segment revenue declined 31% from the year-ago quarter, as the average selling price declined 28% and volumes fell 4%. This segment has slowed due to global macroeconomic conditions, which have especially impacted growth in North America and Europe. The aviation and marine segments declined 28% and 15%, respectively, from the year-ago quarter as both industries experience significant slowdowns associated with the macroeconomic conditions. Revenues in our outdoor/fitness segment declined 9% from the year-ago quarter when we introduced many new products in the segment.”
Results of Operations
The following table sets forth Garmin’s results of operations as a percentage of net sales during the periods shown:
2008 was obviously a better year in net sales and volumes but 2009 reflected critical operational changes. Advertising was trimmed back while research and development expenditures were increased to prepare new product offerings which will be released once the market further stabilizes. A classic Garmin move. The company has significantly increased head count in R& D and makes the following comment:
“The 5.0% increase in research and development expense was due to ongoing development activities for new products and the addition of almost 200 new engineering personnel to our staff since the year-ago quarter as a result of our continued emphasis on product innovation. Research and development costs increased $2.7 million when compared with the year-ago quarter, representing a 250 basis point increase as a percent of revenue, due to the 27% revenue decline.”
Wall Street has also kept its eye on Garmin with both investor volumes and increasing share price. In the last year Garmin stock performance compared to Trimble Navigation and TomTom shows similar economic trending. Garmin has always been the 800-pound gorilla and by the looks of its current defenses and new fortress, is ready to stay that way.
* Garmin versus TomTom with Trimble as a validation point
TomTom Group
The virtual David to Garmin’s Goliath has shown the world that success may still be had in a single-manufacturer-dominated market. TomTom has been a meteor of innovation and sales, relying on outsourced manufacturers to provide the ability to quickly take R&D designs direct to market. Unlike Garmin, TomTom is not encumbered by its own manufacturing facility and the immense labor costs associated with such a venture.
According to the company:
“TomTom's products include all-in-one navigation devices which enable customers to navigate right out of the box; these are the award-winning TomTom GO family, the TomTom XL and TomTom ONE ranges, and the TomTom RIDER. Additionally, independent research proves that TomTom products have a significant positive effect on driving and road safety.
“Tele Atlas delivers the digital maps and dynamic content that power some of the world’s most essential navigation and location-based services (LBS). Through a combination of its own products and partnerships, Tele Atlas offers digital map coverage of more than 200 countries and territories worldwide.”
Like Garmin, TomTom reported second-quarter results in June. A quick analysis and year-over-year financials look like this:
TomTom’s Story Behind the Second Quarter 2009 Financial Highlights
As stated to the SEC by Harlod Goddijn, chief executive for TomTom:
“Revenue for the Group was €368 million for the quarter, an increase of 72.8% sequentially (Q1 2009: 213 million) and a decrease of 24.0% compared with last year (Q2 2008: 485 million). The sequential increase is explained by the expected seasonal increase while the decrease compared to the same quarter last year reflects the impact of the weak economic environment on our business.
“The revenue of the TomTom business (excluding the Tele Atlas business) over the past quarter amounted to €322 million, an increase of 87.5% sequentially (Q1 2009: 172 million) and a decline of 26.5% versus prior year (Q2 2008: 438 million).
“TomTom PND sales amounted to €276 million, representing 75% of Group revenue in the quarter (Q1 2009: 141 million and 66%; Q2 2008: 402 million and 83%).
“Other revenue, which consists of WORK, AUTO, services and other revenue, increased by 51% sequentially to €47 million from €31 million in the first quarter of the year (Q2 2008: 36 million), the increase in other revenue was mainly driven by a strong increase of our automotive sales.
“Tele Atlas revenue (excluding inter company) was €46 million for the quarter, an increase of 11% sequentially (Q1 2009: 41 million) and flat compared to the same quarter of last year (Q2 2008: 46 million). The stable year over year revenue was mainly the result of lower PND and automotive map sales fully compensated by the strong growth in Internet and wireless and in Government and Enterprise.
“Europe represented 73% of total revenue for the Group for the quarter (Q1 2009: 70%; Q2 2008: 74%), North America represented 23% of total revenue (Q1 2009: 25%; Q2 2008: 23%) and the rest of the world was 4% of total revenue (Q1 2009: 5%; Q2 2008: 3%).”
Volumes and average selling prices
According to Goddijn, TomTom shipped 2.46 million PND units in the quarter, an increase of 73% sequentially (Q1 2009: 1.42 million) and a decrease of 20% year-on-year (Q2 2008: 3.07 million).
The average selling price for PNDs in the second quarter was €112, an increase of 13% compared to the previous quarter (Q1 2009: 99) and a decrease of 14% compared to the second quarter of 2008 (Q2 2008: 131). The sequential increase in ASP was driven by new product introductions and less promotional activities than in the previous quarter.
Research and development (R&D) expenses for the quarter were €34 million, an 8.6% decrease compared to the previous quarter (Q1 2009: 37 million) and a decrease of 21.0% compared to the R&D expenses for the previous year (Q2 2008: 43 million). “The decrease is the result of cost reductions particularly in Tele Atlas as we streamline our map production activities,” Goddijn said.
Here is where Garmin and TomTom differ in their approach to their future. Garmin increased R&D spending while TomTom decreased R&D investments. Some of the reasoning could be that TomTom has separate unique business after purchasing Tele Atlas. Looking at the numbers of the company’s map licensing data reflects a considerable drop in overall licensing from 2008. An explanation could be that the high failure rate of new GPS/LBS software companies has re-directed the number to a more established clientele.
With a €430 million equity offering successfully completed, TomTom has sufficient capital for its short-term needs and the ability to restructure even more to prepare for better days.
Conclusion
Both Garmin and TomTom are poised to continue head-to-head competition as PND device sales hopefully regain momentum. A long winter is approaching, and the economic blizzards will continue to wash across the world. Consumer buyers will sit by the fire and clutch their pocketbooks while looking out their window on the world. The Ironmen have beefed up their defenses and put away enough supplies until the snow breaks, yet still wonder when the better days will return. The wolves of the night take the form of smartphones and integrated devices, making their voices heard and giving warning of their arrival.
Sleep well, Ironmen.
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